Question

How is foreign exchange management (FEM)the core issue in international finance and how does it affect balance of payment

Answer 1

Answer:

Foreign Exchange Management (FEM) is the core issue in international finance in that it helps facilitate external trade and maintenance of foreign exchange.

FEM is a tool used by Central bank to adjust currency flows to offset the international exchange of funds thereby effecting balance of payment equilibrium.

Explanation:

Foreign exchange management is  a protective measure against the adverse impact of unanticipated changes in exchange rates. It is at the core of International Finance.

The central bank liaises with the International Monetary Fund, World Bank and other financial bodies to hedge against these unanticipated changes as a way of stabilizing exchange rates.

The balance of payments does not impact the exchange rate in a fixed-rate system because central banks adjust currency flows to offset the international exchange of funds.